BUSINESSWEEK ONLINE : NOVEMBER 27, 2000 ISSUE
INFORMATION TECHNOLOGY SONICblue Is Singing a New Song Kenneth F. Potashner knew it was time for a change. His company, S3 Inc. ( SIII), was having a good run selling graphic accelerator chips for multimedia computers. Investors had bid shares up by more than 1,500%, pushing S3's market cap to $2.3 billion in March from $150 million 18 months earlier. But after the current-model chip, his engineers had nothing in the pipeline--the kiss of death in the cutthroat semiconductor business. ''It's a pretty hostile environment,'' Potashner says. His solution: Buy Diamond Multimedia Systems Inc. ( DIMD), a customer that accounted for 16% of S3's sales. If he owned Diamond, Potashner reasoned, he'd have a captive market for his chips. Then a funny thing happened on the way to the deal table. After seeing the gusto with which his 15-year-old son downloaded songs from the Internet, Potashner realized that Diamond's Rio--the first portable MP3 player on the market--was the company's real gem. Now, Potashner is selling off his chipmaking assets and focusing on consumer gadgets, Internet access devices, and home networking equipment. To underscore the change, on Oct. 31 he shed the geeky S3 moniker for the trendier-sounding SONICblue Inc. The name, Potashner says, sounds ''aggressive, fast, with a real deep foundation.'' BAD TIMING? Sounds great. Trouble is, investors aren't impressed. Despite the new business and spiffed-up name, SONICblue's stock has tumbled 29% in the six months ended Nov. 13, dropping the company to 54th in BUSINESS WEEK's Info Tech 100 from No. 19 in June. The problem: SONICblue, based in Santa Clara, Calif., made the shift just as Wall Street soured on the Internet. Music-industry lawsuits seeking to ban Web sites such as Napster and MP3.com from offering free song downloads didn't help either. ''If there are no freebies, why buy an MP3 player?'' says Lehman Brothers Inc. analyst Joe To. Still, the music hasn't died entirely at SONICblue. Analyst To predicts that the company can increase revenues 150% annually for the next two years from this year's projected $157 million in sales. He expects SONICblue to get back into the black by the middle of 2001, up from a loss of $114 million this year. Why the upbeat tune? An October deal between Napster and Bertelsmann to create a subscription service for Napster users could give Internet swapping of MP3 files a new lease on life. And the Rio player outsells all other MP3 players, say researchers Cahners In-Stat Group, besting offerings from the likes of Sony and Samsung. That's just for starters. SONICblue also is licensing its products to companies such as Nike Inc. ( NKE) For the shoemaker, it's building a tiny oval-shaped player that Nike is flogging as a stocking stuffer for runners and other jocks this Christmas. And Potashner plans to take digital data far beyond the PC. In November, he bought British-based empeg Ltd., which makes MP3 players for cars. And soon he'll launch the ''WebPad''--a handheld Net appliance. ''We needed to jettison our history'' to build the business, Potashner says. He has clearly broken with the past, but whether Wall Street likes the future remains in doubt. By Cliff Edwards in Santa Clara, Calif. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS BW's Info Tech 100: Who's Still Standing? A 20-Year-Old Overnight Success TABLE: Rational Software SONICblue Is Singing a New Song TABLE: SONICblue (Formerly S3) TABLE: The Info Tech 100 INTERACT E-Mail to Business Week Online

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